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Market Update 08-31-10

The Bank of Japan stepped up its stimulus program over the weekend, announcing another 10 trillion yen (a little short of $120 billion), six-month loan program to try to prop up its sluggish economy. The goal is to try to get credit flowing more freely and to weaken the yen, which reached a 15-year high versus the dollar earlier this year as investors flocked to the yen’s perceived stability. In addition, the Japanese Prime Minister Naoto Kan announced a ¥920 billion (approximately $11 billion) economic stimulus. All these measures are aimed to help Japan’s economy, whose exports are being hurt by the strong yen, and whose domestic production remains sluggish.
 
The foreign exchange market reaction was lukewarm to the news, and the yen has held its ground on belief that the additional loan expansion alone (no quantitative easing was announced) will be insufficient to reverse the yen’s recent strength. The Asian stock markets, however, received a jolt from Japan’s actions in addition to expectations of further quantitative easing from the U.S. and the E.U., with the MSCI Asia Pacific Index booking its biggest gain in five weeks immediately after the announcement.
 
While Japan’s economic recovery, too, is slowing, at 3.4 percent it is still projected to grow faster than either the U.S. or the E.U.
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Market Update 08-24-10

BHP Billiton’s (BHP) bid to take over Canadian fertilizer producer Potash Corporation of Saskatchewan (POT) has officially been rejected as being too low. But the buzz created by the takeover attempt isn’t dying. First, there was speculation that one of the Chinese state-owned enterprises would step in and shell out the cash for Potash—if anyone has ample cash for the acquisition, the Chinese do. Today, there’s new speculation that BHP’s Australian rival, Rio Tinto (RTP), may partner with a Chinese company and submit its own bid for Potash. Rumors are also circulating that fellow fertilizer producer Mosaic (MOS) may partner with other agricultural companies to acquire Potash.
 
The high level of interest in Potash highlights the bullish case for fertilizers, essential for growing crops. In the long run, population growth and improving standards of living in developing countries should lead to continual demand for fertilizer to increase food supply. In the nearer term, the rally of crop prices due to adverse weather conditions (for example, Russia’s drought and wild fires) reducing supply should lead to an extra demand jolt for fertilizers as farmers scramble to take advantage of more favorable pricing.
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Market Update 08-17-10

It was only a matter of time, but China has now officially overtaken Japan as the second-largest economy in the world. According to government statistics, China’s GDP totaled $1.33 trillion in the second quarter, slightly ahead of Japan’s $1.28 trillion output. Given China’s growth momentum and Japan’s own sluggish economic recovery, it appears almost certain that for the full year China’s economy will be larger.
 
This is only the latest milestone for China, as it has already surpassed the U.S. as the world’s largest energy consumer and the biggest car market, and Germany as the largest exporter. Although its economy is still only a fraction of the U.S. economy, China could surpass the U.S. as number one as soon as 2030. Despite prodigious growth in the last few decades, large parts of the country still remain woefully underdeveloped and per-capita income is still less than one-tenth of that of the U.S., still leaving plenty of room for urbanization and growth.
 
With its growth, however, China will put an increasingly large strain on the world’s resources. Not blessed with rich natural resources but flush with cash, the Chinese have been on a rampage to secure resource assets around the world via acquisitions through its state-owned companies.
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Market Update 08-10-10

The term “bank stress test” has been floating around in the news quite a bit lately with the Europe testing its banks to rebuild investor confidence. China will now join in the fun and conduct one of its own. Last year, China carried out stress tests with the assumption of home prices dropping by up to 30 percent; this time around, China said it would make the test even more rigorous, testing the ability of its banks to withstand home prices falling as much as 50 to 60 percent in cities where prices have risen the most dramatically. The tough standards of China’s stress test makes Europe’s own stress test look like a farce.

While the move suggests that Chinese policymakers are concerned about the health of the real estate market, it also shows, as usual, the communist government’s pre-emptive and no-nonsense approach in managing its economy. The severity of the adverse scenario (up to 60 percent price decline) to be used in the stress test in the most lucrative real estate markets is more policymakers wanting to make sure its banks can handle the worst case scenario rather than them believing that a 60 percent drop would really happen.Read more...

Market Update 08-03-10

The European bank stress tests were completed a couple of weeks ago in an effort to reduce investor anxiety, but now U.S. banks are coming into the spotlight again after the International Monetary Fund (IMF) announced its own findings. IMF’s report on the U.S. financial system concludes that while the U.S. banking system is stable for now, it is not out of the woods. Banks would need to raise billions of dollars in the event of deterioration in the real estate market and the general economy. Banks could need an additional $76 billion to meet their capital reserve requirements in an adverse scenario. Read more...

Market Update 07-27-10

The results of the stress tests on EU banks, meant to assure the public that the banks have enough capital to survive if the debt crisis worsens, are out. More than 90 banks were tested, and with the exception of 7, all passed. Going in, as the tests were meant to be a calming pill for investors, the vast majority of the banks were expected to pass, so the results were no surprise. As in the case with the U.S. bank stress tests more than a year ago, there’s plenty of skepticism whether the stress tests were rigorous enough or were they merely for show. For example, what would happen in the event of a sovereign debt default—the scenario that most fear could trigger a full blown financial tsunami—was not even tested. The banks that failed (five Spanish savings banks, an already nationalized German mortgage lender and Greece’s ATEbank) will have to raise €3.5 billion total over a period of time still to be determined.

The euro has rallied in July after falling to a four-year low in June, on some signs that European economies aren’t as bad as feared and the beleaguered countries like Greece, Spain, and Portugal appear to have satisfied debt obligations for the time being. The stress test results have been treated as positive reinforcement, even though their execution was likely flawed (or not “stressful” enough).  Read more...

Market Update 07-20-10

China’s economy grew 10.3 percent (annualized) in the second quarter, down from the 11.9 percent mark in the first quarter but still, at double digits, easily at the front of the pack among major economies. China’s State Information Center reports that in the second half of the year, export growth may slow down to 16.3 percent as a result of slowdown in the global recovery. The press is reporting this as a halving of China’s export growth rate because the year-on-year improvement was 35 percent in the first six months of the year.
 
However, it should be noted that China’s exports improved by approximately 30 percent in the second half of 2009 compared to the first half, so the slower growth rate can partially be attributed to having a tougher comparison benchmark. To put it in a perspective, compared to the first half of this year, Chinese exports will still grow by about 12 percent sequentially even if the forecast for the slowdown in the year-over-year growth is on target, hardly a terrible figure. It’s worth reiterating that for all the talk of China slowing down, it will still remain the fastest growing major economy, and many economists think that a more moderate growth pace is better for the well-being of the country in the long run.
 
Indeed, with growth moderating from overheating pace, the Chinese government will find it easier to take a more supportive stance on its economy.
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Market Update 07-13-10

The International Monetary Fund, or IMF, has raised its global growth forecast for 2010. On the heels of better than expected growth in the first half of the year, the organization now calls for the world economy to expand 4.6 percent this year, up from its previous 4.2 percent projection in April. The forecast for next year was kept unchanged. The usual suspects of fast growers like China, India, and Brazil are leading the charge (the growth rate forecasts for all three were also upgraded). Not surprisingly, the IMF report reflects the same divergence trend between developed and developing countries we have been discussing in this newsletter.
 
However, even as it issued its more optimistic outlook, the IMF is urging countries to implement plans to lower deficits—further ballooned by stimulus efforts in late 2008 and 2009 to battle the financial crisis and recession—over the next few years, citing financial risks threatening global economic recovery. The report noted that while there is little evidence that the debt crisis in Europe has spilled over, some countries are struggling with high deficits, unemployment, and constrained bank lending, all factors that could derail recovery. As if we needed more proof that the European debt woes are serious, Portugal’s credit rating was cut today by Moody’s.
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Market Update 07-06-10

Over the past week, weaker than expected employment and other economic data here in the U.S. has lead to significant pressure on U.S. markets. Emerging indices along with industrial metals, shaken by the decline in China’s June Service PMI that followed a slowdown in its manufacturing, were also weak last week, but rallied yesterday; altogether, they were markedly stronger than the U.S. indices, reflecting a stronger growth in the developing world.

Australia will keep its benchmark interest rate unchanged at 4.5 percent for the second straight month. With interest rates having been raised six times since last October and global economic recovery appearing to slow down, the Royal Bank of Australia noted justification for standing pat for now. The central bank also stated today that consumer spending and business investment were expanding, helping to alleviate some concerns of slowdown in the country. The Aussie dollar declined last week, also on slow-down concerns.Read more...

Market Update 06-29-10

The leaders of the Group of 20 countries have announced that their response to the most pressing economic issue of today, the European credit crisis, is to cut deficits and require higher bank capital reserves once recoveries occur. Advanced G20 economies (excluding the developing country members of G20) will shoot for reducing their deficits by 50 percent by 2013 and to stabilize their debt-to-GDP ratio by 2016. Each member will be able to proceed at their own pace depending on how quickly recovery takes hold in their respective countries, however, giving the appearance that the resolution is more lip service than commitment with any bite.

There’s also a divergence of immediate approach between the U.S. and its European counterparts. While the U.S. has pushed for more stimulative efforts to prevent a double dip recession, the U.K. and Germany are for spending cuts. The G20 as a group is struggling to balance these differing views, and the result is the half-hearted deficit reduction goal. This underscores how difficult it is to get unanimous agreement among nations to take coordinated global action and highlights the-rock-and-a-hard-place dilemma that the highly indebted developed countries find themselves in. On the one hand, national debt is getting out of hand, but on the other, spending cuts could send their fragile economies spiraling into another downturn.Read more...